When Thailand’s KBank invested in southeast Asia’s top ride-hailing platform, Grab, it disclosed that one of the primary aims was to harness data on the financial profiles of taxi drivers and users to customize services.
I will not invest in a fintech solution or one of our ventures unless there is a business unit also involved
This collaboration has led to a co-branded credit card for Grab users – a good example of the potential that venture capital (VC) and bank collaboration can hold.
Many smart banks have set up venture units to act as a radar for tech trends and as bridges to fintech prowess. But who should run these units?
A venture capitalist parachuting into a bank may bring a wealth of investment experience, but they often lack a detailed operational understanding of the bank and its legacy systems. A banker may not have the deal-sourcing acumen associated with a venture fund.
“The venture arm will typically, at HSBC’s case, only invest where there is a business synergy,” explains Vivek Ramachandran, HSBC’s head of global trade and receivables finance.
“I will not invest in a fintech solution or one of our ventures unless there is a business unit also involved,” agrees Alex Manson, who heads SC Ventures at Standard Chartered, having formerly led global transaction banking at the firm.
Pivotal tasks
Venture investing revolves around two pivotal tasks: deal sourcing and decision-making based on start-up assessments. While venture capitalists excel in deal sourcing, they often rely on bankers for insights into the technology and practical applications.
Manson says: “VC firms call us a lot, as they are not really sure – will that work? Is that useful? Especially adding the context of regulatory. We understand the use case and implementation, whether and how it can scale up.”
The advantage that fintechs have is that they can focus on an incredibly small problem and solve it. The advantage that banks have is that we can look wide across the pieces
Such collaboration naturally lightens bankers’ deal-sourcing efforts, as VC firms regularly funnel opportunities to bank venture units for validation, which in turn enables banks to participate in co-investments. This fosters a symbiotic dynamic: VC firms source deals; and banks provide critical evaluations.
“The advantage that fintechs have is that they can focus on an incredibly small problem and solve it,” points out HSBC’s Ramachandran. “The advantage that banks have is that we can look wide across the pieces.”
This has made bank validation and partnership the most scarce and critical resources for fintech development. But start-ups can find it tough to forge partnerships with banks – even when introductions are facilitated by venture units. Often operating independently, business units are not compelled to act on the venture units' recommendations.
This underscores a second argument for banker-led investment units: bankers’ holistic understanding of organizational pain points and their ability to forge collaboration and validation. This serves not only the bank’s own primary objectives, but also injects expertise into the VC industry and bolsters fintech portfolio development.
“It’s crucial to acknowledge the difficulty of driving synergy and then actively work on it,” says Manson at SC Ventures, which has a team of 100 professionals with an emphasis on post-investment synergy. “We have dedicated full-time staff to foster these connections and run intrapreneurship programmes within the bank.”
Two schools
Not all venture capital firms take such an active role.
The venture capital landscape today is split into two primary investment schools. One mirrors index investing, where investors spread bets across all top-tier start-ups in a sector, with limited vetting, counting on one or two to deliver outsized returns.
Tiger Global, with 335 investments in 2021, became synonymous with this method – fast cash, lofty valuations and a laissez-faire stance. This approach, while once heralded, has faded in the face of the surge in interest rates. Reports from The Wall Street Journal indicate a 33% markdown in the firm’s private venture capital funds in 2022, erazing a staggering $23 billion in value. Meanwhile, Crunchbase indicates a quiet 2023 for Tiger, with involvement in just 27 deals totalling less than $2 billion.
For banks, the alternative approach is more aligned with their DNA: becoming sector specialists. These specialized venture capitalists narrow their focus to industry-specific areas – be it retail, clean energy or semiconductors. For banks, this translates to a natural gravitation towards fintech.
Unlike the let-it-be index investment style, specialist funds are more akin to diligent gardeners nurturing a select crop. This approach requires a high degree of involvement – something that bankers are better positioned to provide.
SC Ventures exemplifies this approach. In the past five years, the unit has launched 36 ventures and made two exits in 2023.
In an increasingly competitive landscape, banks must deftly navigate from in-house tech innovation to strategic equity stakes and external partnerships. Viewing these moves holistically, bankers emerge as the natural leaders for VC teams, aligning investments with the bank’s core objectives and leveraging their sector-specific acumen for maximum impact.
“For certain problems, it’s advantageous to acquire an equity stake in a fintech and collaborate directly,” says Ramachandran. “For other aspects, such as our trade platform (HTS), partnering with a major tech company like CGI is the preferred approach.
“Then, there are instances where in-house development is necessary due to the uniqueness of our systems.”
